In a year in which Africa’s airlines continue to struggle against the long impact of Covid-19, the stakes are particularly high for two of the continent’s biggest airlines, which are tentatively pooling their resources in a fight to survive.
Kenya Airways (KQ) and South African Airways (SAA) signed a Strategic Partnership Framework in South Africa last November, which if implemented, is expected to improve the financial viability of the two carriers by cutting costs, increasing the size of the available fleet at their disposal through code sharing, and potentially leading to a new pan-African airline group by 2023.
Kenyan President Uhuru Kenyatta told his listeners during his New Year’s address that KQ and SAA will “join hands” to overcome the economic difficulties they both face. Through the arrangement, tourism, trade, and social engagement in Africa can be boosted, he said. Spokespersons from the airlines have denied that a full merger is on the cards but have talked up the planned cooperation.
Both KQ and SAA have lost market share in Africa to the profitable Ethiopian Airlines over the last decade, while the strategic advantages that Middle Eastern carriers enjoy flying in and out of Africa as a result of cheap fuel, ideal hub locations, and strong support from cash-rich governments, has accentuated problems caused by financial mismanagement, debt and pilot shortages.
“It’s impossible to survive if you don’t have a critical mass, so SAA in its heyday had maybe 30 to 40 aircraft, Kenya Airways has 34 aircraft, and if I look into the future of airlines in Africa, then we have very little chance to survive on our own long-term without continuous taxpayer support, because our size is just too small to be cost effective and to compete on a level playing field with the big guys,” says KQ chairman Michael Joseph.
“We need to have some sort of merger or joint venture arrangement between airlines to give us that critical mass,” he tells African Business.
With the odds stacked against them, KQ and SAA are placing their bets on returning to profitability together, after years of heavy losses and bankruptcy.
The stringent travel restrictions imposed by African governments during the pandemic caused severe revenue losses throughout the last two years, causing a collective loss of nearly $8.6bn in 2021 for Africa’s airlines, according to a report by the African Airlines Association (Afraa).
With 42.3% less traffic volume across Africa from January through to December 2021, and following a stuttering start to 2022 in the wake of Omicron, Africa’s airlines are again battling cash-flow issues.
Is a new group on the cards?
Some industry experts believe a new airline group could cut costs by conducting staff training together, while sharing maintenance duties, catering, HR and aircraft purchases. This could result in economies of scale, allowing the group to compete and offer cheaper tickets and prices for passenger and cargo segments, says Joseph.
The partnership will mean each airline still maintains its own brand, aircraft, hubs and strategic positions, while boosting traffic density and the exchange of knowledge, expertise, innovation, and best practice.
KQ reported losses of more than $333m in 2020, and then went on to lose a further $100m in the six-month period up until July 2021. Despite pivoting its operation to focus on cargo to minimise losses during the worst of the pandemic, the carrier’s business operation is hanging by a thread. In June last year, KQ couldn’t pay its staff on time even after cutting employee salaries by 5% to 30% in January 2021, for six to 12 months.
2013 was the last financial year KQ was in profit, when it saw gains of $72m after a decade of profitability following its privatisation and listing on the Nairobi Securities Exchange. After years of losses, the Kenyan parliament voted to nationalise KQ in June 2019, and trade in shares on the NSE was suspended. But the National Aviation Management Bill is still to be finalised, and the IMF says the government has now dropped plans to nationalise the flag carrier.
The government’s 48.9% stake in the airline remains, and a $473m cash injection has been provided in direct budget support in the fiscal year ending June 2022. Kenya’s finance minister Ukur Yatani said the government would take on $827m of KQ’s debt.
SAA’s fortunes have been similarly bad, with the airline running up massive losses until bankruptcy demanded that the South African government initiate a painful restructuring process in December 2019.
After 17 months in administration, SAA exited its “business rescue” in April 2021, and only resumed commercial flights in September last year, after news that it would be privatised by selling a 51% stake to the Takatso Consortium, consisting of Global Airways, which owns low-cost airline LIFT, and infrastructure investment firm Harith General Partners.
Marcel Langeslag, director of aviation for Africa at Netherlands Airport Consultants in Johannesburg, says that a codeshare agreement – numbering a flight with the airline’s code even though the flight is operated by another airline – and interlining – a voluntary commercial agreement between individual airlines to handle passengers travelling on itineraries that require multiple flights on multiple airlines – will likely form an initial part of the cooperation and broaden both airlines’ international reach.
“Once both management teams start working together with that low-hanging fruit, then they can work their way up to more difficult things like joint purchases of aircraft,” says Langeslag.
Airline partnerships are difficult to pull off, especially when they are flag carriers. The Air France-KLM Group has seen significant growth since getting together in 2004. But their unity has been tested by working disputes between the two carriers. A sense of injustice has festered following allegations that French pilots are paid more than the Dutch, and disputes over legacy cost structures have stoked further division among staff.
An academic study showed that 50% of strategic alliances fail due to cultural differences, mistrust or poor operational integration. Airlines based in high-income countries operating in liberalised skies, with large domestic traffic bases, fare much better.
“National and political prestige is keeping the two airlines [SAA and KQ] going, as letting a big company that employs a lot of people go bust is a difficult sell to your electorate. You could think about the sort of geographic location that complements each other quite well in this partnership. But when you look at it from the business perspective, it’s very hard to see how they will really pull it off,” says Langeslag.
Market liberalisation is essential
More important than partnerships to the future profitability of Africa’s airlines is liberalising air traffic on the continent, says Eric Tchouamou Njoya, lecturer in air transport economics at the UK’s University of Huddersfield. Africa has at least 350 mostly small airlines that face a high cost of operation and market protectionism.
In 1999, 44 African countries agreed in Yamoussoukro, Côte d’Ivoire, to deregulate air services and promote the opening up of regional air markets to transnational competition, but the implementation has been painfully slow and inconsistent.
The latest incarnation of that attempt is the Single African Air Transport Market (SAATM), launched in 2018, and signed by 35 of Africa’s 54 countries. The African Union says that air traffic would be boosted, resulting in reduced taxes, greater competition and cheaper fares by an average of 26% for the average intra-African passenger.
“Africa will soon have almost 2bn inhabitants, and so the market is there if the connectivity is provided. African airlines need to build stronger hubs and KQ and SAA are well positioned to do that. But they need market liberalisation, the right business strategy and the right aircraft,” says Njoya.